Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Wednesday, October 1, 2008

I have been trying on this blog to focus on other things than the current financial situation that everybody else is covering, but it is getting really difficult. The government is trying to find ways to get lending institutions to lend again, and guess what the FDIC is doing?

Preventing them from lending. That's right. The FDIC is going through the banks, looking at their balance sheets, readjusting the risk measures of the loans (I am fine with that), downgrading to junk anything that is related to real estate. That is problem number one: Not every real estate loan is poorly performing. In fact, most are still paying their mortgage every month, and will be until maturity. Forcing bank to basically write off every real estate loan is poor risk management. The consequence for most banks is that their rating with the FDIC is tanking, they must pay higher premiums to the FDIC and must recapitalize.

But it gets worse. The FDIC forces bank not to make loans, unless they are backed by cash. Banks are even asked to call back loans of well capitalized borrowers that were performing just fine. The FDIC is taking a wholesale approach killing all real estate loans, severing long-standing business relationships and basically negating all government efforts to get lending going again.

The FDIC has a mission, ensuring depositors can get to their money if needed. But it should not act in isolation of the other agencies, and it should not kill performing, sane business relationships. We definitely need to reduce the alphabet soup and merge the regulating agencies so that they can cooperate.

We went through such an FDIC exam recently, and it got us all up in arms. We have had many performing loans downgraded to substandard just because they were linked somehow to real estate. Our CAMEL rating was badly hurt for no reason.

There are some people out there who do not know what they are doing. But we know, we never went into subprime lending, but now we have to pay for the others. Really upsetting.

My terrible fear in all of this is the State. Things are pretty bad with the mistakes that were bad by private companies; but the State can inflict upon the market with the force of law such insanities - utterly unrelated to the reality of the market or of what is needed - that the State is the single force which can turn bad into catastrophe.

I agree that this is scary in the sense that the government came make the situation much worse. Just look at the Great Depression, where government intervention made a mountain out of a potentially normal recession, in particular thanks to massive intervention in banks and the labor market.